Surplus to requirements (2009) describes a shrinking trade surplus in China. Exports have slumped, but imports have fallen even more, down by 21% last year. Imports have been dragged down by the global credit freeze, cheaper oil and commodity prices and by weaker imports of materials and components used to make exports. Further, domestic demand has weakened, particularly in construction. Yet, the article takes a rather optimistic view of China's likely response, stating that the best course for China is to bolster domestic demand. On this matter, details are sketchy with recommendations for continued credit growth. However, the article should have given more consideration to China's economic realities as well as its long history of undervaluing its currency and protectionism for unfair trade advantage.
In per capita terms the country is still lower middle-income and there is still substantial underemployment and unemployment in rural areas. With rising unemployment comes the real threat of massive social unrest. This is why one of China's major goals has been to keep people employed. An undervalued currency helps China meet this goal because it makes exports cheaper and gives China a competitive edge. It also makes U.S. exports to China more expensive. Having an undervalued currency is a big magnet for companies that want to build manufacturing in China. Further, China already pursues industrial policies that rely on trade-distorting measures such as local content requirements, import and export restrictions, discriminatory regulations and prohibited subsidies. China limits market access for non-Chinese origin goods and foreign-service providers, and provides substantial government resources to support Chinese industries and increase exports.
Credit growth may indeed be one of China's responses to its economic downturn along with other stimulus measures. However, it also seems likely that China will ramp up its currency and trade policies to maintain stability.
Bibliography
Surplus to requirements (2009, January 15). The Economist. http://www.economist.com/finance/displaystory.cfm?story_id=12948617
